Here’s a topic that is rarely discussed on our dividend blogs. We always discuss and track dividend increases, dividend growth, yield and yield on cost, long term capital appreciation, but rarely stock spin offs. I love stock spin offs. I think they are really neat. Stock spin offs have a unique way of creating shareholder value that goes beyond capital appreciation and dividend increases. For those who are new to investing a stock spin off is basically the creation of a brand new independent company from a parent company. This is usually done by the sale or distribution of new shares to shareholders of the parent company. That’s right… as a shareholder of a parent company you will receive (not buy) shares in a new company.
The main reason for a company to do a spin off would be to unlock shareholder value by creating two separate businesses that can focus on their core business or sector more efficiently. Many conglomerates operate businesses in many sectors and thus have an inability to focus their company in only one appropriate direction. General Electric Company (GE) for example, makes light bulbs, washers, dryers, medical equipment, jet engines, turbines, locomotives and are even into finance and banking. Clearly they do a lot of different things. It’s often companies that have several different focuses that are candidates for stock spin offs.
Let’s take a look my fictitious company, DivHut Inc. a producer of rubber balls and a home mortgage seller. As a single company, DivHut Inc. is valued at X but by separating DivHut Inc. into DivHut Rubber Balls and DivHut Home Loans each separate company can be valued at X and X. In other words, two X versus one X. This is a super simplistic way to look at company value and the resulting company value after a spin off but the point remains the same. Two companies are worth more individually than as smaller parts of a larger business. And usually if the parent company pays a dividend so does the child company. In other words, from one dividend payer you would now have the power of two.
Here are some real life examples from my dividend portfolio.
Abbott Laboratories (ABT), the large health care, pharmaceutical and consumer product company recently split into two companies with the spin off of AbbVie Inc. (ABBV). Now, ABT is more focused on health care products and consumer products, think Ensure, PediaSure nutrition drinks, Similac baby formula, contact lens solution and LASIK laser vision correction surgery while ABBV is focused on the pharmaceutical sector working on HIV and cholesterol medication. Both pay dividends.
Ingersoll-Rand Plc (IR), an industrial conglomerate that manufacturers compressed air systems, golf carts and air conditioners recently spun off it’s security business, which includes brands such as Schlage and Kryptonite bike locks, among other home locks and doors to form Allegion plc (ALLE). Both pay dividends.
Altria Group Inc. (MO), the cigarette powerhouse spun off Philip Morris International, Inc. (PM). An interesting point about MO, is that this company created several other companies by doing multiple spin offs. MO spun off PM as it’s international cigarette business. It also spun off Kraft Foods (KFT). Not many people know that Cheez Whiz and Marlboro were at one time the same company. Well a few years later KFT became Kraft Foods Group, Inc. (KRFT) and Mondelez International, Inc. (MDLZ) and very recently MDLZ just announced that it was merging it’s coffee business with D.E Master Blenders 1753 creating a new coffee powerhouse business to be called Jacobs Douwe Egberts.
Recently announced spin offs include General Electric Company (GE) spinning off Synchrony Financial (SYF) and Kimberly-Clark Corporation (KMB) spinning off K-C Health Care. Both spin offs are pending but should happen late 2014 or early 2015.
Who says you need to invest in the sky high PE’s of dot coms or other hyped up stocks for some excitement. There are plenty of exciting things that can happen with “boring” dividend stocks.
Do you have any stock spin off stories? Let me know.
Disclosure: Long ABT, ABBV, IR, ALLE, PM, KRFT, MDLZ, GE, KMB